Question

A mutual fund manager has a $20 million portfolio with a beta of 1.75. The risk-free rate is 5.50%, and the market risk premium is 5.0%. The manager expects to receive an additional $5 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 16%. What should be the average beta of the new stocks added to the portfolio? Do not round intermediate calculations. Round your answer to two decimal places. Enter a negative answer with a minus sign.

Answer 1

Portfolio Beta = Wtd Avg Beta of securities in that Portfolio.

Let X be the Beta of new stocks.

Computation of Portfolio Beta:

Portfolio Req ret = 16%

CAPM ret = Rf + Beta (Rm - Rf)

16 % = 5.5% + beta (5%)

Beta (5% ) 10.5%

= 2.10

portfolio Beta:

From above Two

2.10 = 1.40 +0.2X

0.2 X = 0.7

X = 0.7 / 0.2

= 3.5